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COMPILATION: Why is Electricity Expensive in the Philippines?

July 26, 2010

Intergovernmental Group of Experts on Competition Law and Policy
Electricity Reform in Practice:
The Case of Thailand, Malaysia, Indonesia and the Philippines

Electricity is one of the most important facilitating modern activities and country’s development. Through time, the importance of electricity to people’s life has only increased.

On this ground, more efficient and reliable provision of electricity is desirable for the society.

This paper first examines past and present development of the electricity sector in four Southeast Asian countries–Thailand, Malaysia, Indonesia and the Philippines.

It then, discusses lessons learned from the past experiences and provides policy recommendations for the four countries.

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In developing countries, the surge of high demand for electricity began after the World War II. Electricity was one of the most crucial infrastructures facilitating modern development and industrialization. With advices and supports from the cold-war superpowers and multilateral development agencies, especially the World Bank, many developing countries adopted the state-led model and established their state-owned electricity enterprise (Williams and Ghanada, 2006). Thailand, Malaysia, Indonesia and the Philippines were among them. Prior to the late 1980’s, electricity production and transmission was owned by a state-own monopoly: EGAT in Thailand, National Electricity Board (NEB) in 11 peninsula states of Malaysia, Sabah Electricity Board (SEB) and Sawawak Electricity Supply (SESCO) in Borneo states of Malaysia, Perusahaan Umum Lishtrik Negara (PLN) in Indonesia and National Power Corporation (NAPOCOR) or (NPC) in the Philippines.
In these countries, development of electricity sector varied by speed and direction. The fact that Indonesia and the Philippines contain several small islands makes electricity distribution difficult. In 1990, electrification rate was 37.3 percent in Indonesia, 54.6 percent in the Philippines and 92.7 percent in Thailand (World Bank Publication, 1994). High electricity demand due to rapid economic growth in the cities also caused electricity blackouts during the peak hours (Sharma et al., 2004).

Facing financial constraint, the government of Indonesia and the Philippines had to legalize IPPs to produce additional electricity supply. In 1989, the Philippines was the first of the four countries to allow independent power producers (IPPs). By the end of 1993, more than 25 IPPs were producing electricity in the Philippines and the power shortage problem was resolved (Abrenica, 2004)

As in 2007, the electricity industry in Thailand, Malaysia, Indonesia and the Philippines is still highly vertically and horizontally integrated. The generation is still operated by either a state-owned monopoly (Thailand, Indonesia and the Philippines) or a corporation heavily controlled by the government (Malaysia). At the wholesale level, there is very little to no competition. Transmission is generally monopolized. Distribution is monopolized in Malaysia and locally monopolized in Thailand, Indonesia and the Philippines.

Next, we evaluate privatization and reform policies adopted by the four countries.

Philippines privatization and reform policies

When we abstract away from market imperfection–i.e. political influences and transaction costs–competitive conduct and higher efficiency could be achieved. To promote competition in the wholesale market, the government could privatize the state-owned enterprise, split it into smaller companies and let those companies compete in a competitive manner with all other IPPs. As for the retail market, the government could allow more companies to serve this function. Competition is believed to result in higher efficiency and lower price.
In reality, the electricity industry is very complex. First of all, the monopoly state-owned enterprise is subject to much control from the government. The rational behind many policies adopted in the past could be explained by pure politics. Second of all, electricity production requires high initial investment and takes a long time to break even. In developing countries, where the government still wants to attract private investors into the production field, rigorous competition could discourage them. Third of all, restructuring, unbundling and break-up of companies are often time irreversible. It takes time and has to be well-planned because unsuccessful outcome could result in great and unnecessary lost.

3.1 Privatization

In theory, privatization could lead to the following achievements: 1) private companies are subject to less counterproductive interference by the government, 2) if the government is financially constrained, privatization is a means to raise money and 3) foreign private investors could bring skills and technology to the country (Thomas, 2006). In practice, however, those achievements are not always realized. Factors such as politics and inefficient contracts can lead to anti-competitive and efficient conducts.
In Thailand, Malaysia, Indonesia and the Philippines, privatization took two forms. One is through allowing IPPs and another is through privatizing the state-owned enterprise. We next discuss each of these issues in detail.

3.1.1. IPPs

During the late 1980’s to early 1990’s, the government of Thailand, Malaysia, Indonesia and the Philippines legalized IPP to allow private participation in the electricity sector. The Philippines was the first among the four countries to allow IPPs. During the late 1980′s and early 1990′s, the country’s rapid economics growth led to high electricity demand. Blackouts of up to 10 hours were common and their economic cost was substantial (Sharma et. al., 2004). In 1989, the first IPP contract was signed. By the end of 1993, more than 25 IPPs were producing electricity in the Philippines and the power shortage problem was resolved (Abrenica, 2004). However, inequitable contracts and brought about large financial burden to the government (Abrenica, 2004). In 2001, about 41 percent of electricity is produced by IPPs and the rest by NAPOCOR (Woodhouse, 2005)

3.2. Wholesale Competition

The legalization of IPPs in Thailand, Indonesia, Malaysia and the Philippines provides a good foundation to promote competition in the wholesale market. Currently, however, IPPs directly supply to the national electricity authority under inflexible long-term bilateral contracts. There is very little to no wholesale competition in the wholesale market.

Encouraging competition in the wholesale market is risky when the market is not mature and there exist dominant sellers. Negotiation failure between sellers and buyers can lead to power shortage. Abuse of dominant power by big sellers can drive smaller firms out of the market. In the case of UK, Norway, Alberta and California, failure of market reform is resulted by “market power abuse of a few dominant sellers” (Woo et al., 2003). Thus, as long as the markets in Thailand, Malaysia, Indonesia and the Philippines are still dominated by a state-owned monopoly, competition in the wholesale market should not be enforced.

3.3. Retail Competition

Providing choices of retail services has not been taken seriously in Thailand, Malaysia, Indonesia and the Philippines. This is because the countries have been focusing on delivering electricity to rural communities and guaranteeing peak-load supply in the cities.

3.4. Unbundling

Unbundling of the four functions of the electricity sector–generation, transmission, distribution and retail–has been taken into consideration when countries make plans for privatization. In 2001, the Philippines government approved of a full privatization of the electricity sector through the Electricity Power Industry Reform Act (EPIRA) (Thomas, 2006). This includes unbundling generation, transmission, distribution, and retail services. As in 2007, the Philippines has already split the National Transmission Company (TRANSCO) from NAPOCOR. Both TRANSCO and NAPOCOR will be privatized, but the implementation has been delayed (Thomas, 2006).

3.5. Introduction of Independent Regulator

Since competition in the electricity sector is far from perfect, a regulatory body is needed to mimic competitive market conducts, promote efficiency and ensure fair practices. To achieve such outcomes, a regulatory body should be independent from political influences and understand complex conditions and problems of the electricity sector in each market. So far, none of the four countries has established a regulatory body to serve such functions.

4. Summary and Conclusion

During the late 1980’s to early 1990’s these four countries started to legalize IPPs to promote private participation in the electricity generation field. These IPPs alleviated the power shortage problem in Indonesia and the Philippines and served as an initial step towards market liberalization in all four countries. Since power plants are expensive, electricity demand is unpredictable and it could take a long time for the company to breakeven, the government had to provide them some insurance for healthy profit. This includes take-or-pay, dollar-pegged payment, and guaranteed rate of return clauses. Throughout the past decade, especially right after the Asian financial crisis in 1997, the governments have been struggling to meet these obligations.
It is, however, possible for the government to achieve more equitable contracts through renegotiation. Lessons learned from past experiences reveal that the take-or-pay and dollar-pegged clauses are very risky. When countries are hit by unforeseeable economic crisis and reduction in demand for electricity, the governments would have no choice but to pay for unutilized capacity. If the payment is in other currencies, currency devaluation would result in even greater loss. Here, contract renegotiation is a means to achieve equity. In the Philippines, the government renegotiated some of their IPP contracts and believed to have saved at least US$ 1 billion (Thomas, 2006).

In this paper, we first examine development towards liberalization and privatization of the electricity sector in four Southeast Asian countries-Thailand, Malaysia, Indonesia and the Philippines. During the late 1980’s to early 1990’s these four countries started to legalize IPPs to promote private participation in the electricity generation field. These IPPs alleviated the power shortage problem in Indonesia and the Philippines and served as an initial step towards market liberalization in all four countries. Since power plants are expensive, electricity demand is unpredictable and it could take a long time for the company to breakeven, the government had to provide them some insurance for healthy profit. This includes take-or-pay, dollar-pegged payment, and guaranteed rate of return clauses. Throughout the past decade, especially right after the Asian financial crisis in 1997, the governments have been struggling to meet these obligations.

It is, however, possible for the government to achieve more equitable contracts through renegotiation. Lessons learned from past experiences reveal that the take-or-pay and dollar-pegged clauses are very risky. When countries are hit by unforeseeable economic crisis and reduction in demand for electricity, the governments would have no choice but to pay for unutilized capacity. If the payment is in other currencies, currency devaluation would result in even greater loss. Here, contract renegotiation is a means to achieve equity. In the Philippines, the government renegotiated some of their IPP contracts and believed to have saved at least US$ 1 billion (Thomas, 2006).

In many cases, however, equity may not have been the objective in the first place. IPP permits in Malaysia and the Philippines are mostly granted through nontransparent processes to investors with connections and cronies (Smith, 2003) (Seymour and Sari, 2002). The permit winners usually received contract terms that greatly favor them. Here, although it is possible for the government to cut their loss through renegotiation, they may not choose to. Apart from the complexity of the electricity sector itself, politics is also an important cause of inefficiency.

Other than the legalization of IPPs, market liberalization through other means in the four countries has been limited. We analyzed the electricity sector liberalization in five aspects–privatization, wholesale competition, retail competition, unbundling and introduction of independent regulation. The idea to progress towards each of these aspects has long been discussed in all the countries. However, the implementation has been very slow. In Thailand, privatization of the state-owned enterprise has been strongly opposed by the EGAT’s employees union. They claimed that it could lead to higher electricity price, nontransparent allocation of shares and takeover by foreigners. In Malaysia, the government corporatized 30 percent of Tegana. The company is still mostly controlled by the government and the corporatized shares were allocated people with connections and cronies. In Indonesia and the Philippines, privatization of PNL and NAPOCOR has been planned, but not yet executed.

Privatization would be useless if it does not bring about any competition and efficiency gain. In Malaysia, liberalization of Tenaga did not increase competition in the wholesale market and did not necessarily promote efficiency. It seems that the only obvious result was wealth transfer from the public to shareholders. In the case of Thailand, Thaksin’s privatization without liberalization of EGAT is likely to yield a similar result. If competition and efficiency are not achieved, any form of privatization would be meaningless.

Wholesale and retail competitions are still not yet developed in the four countries. This might be because the current market structure does not facilitate wholesale competition. As long as the state-owned monopoly has not been privatized and divested into smaller companies, the monopoly will tend to abuse its dominant power (Woo et al., 2003). As for the retail market, competition and more choices could help increase consumer’s surplus. However, as long as privatization and wholesale competition has not been implemented, retail competition is unlikely to result in much gain. As for unbundling, without competition in the wholesale and retail markets, the process would not be meaningful.

An independent regulator is what all the countries need. However, the process of establishing one is not easy. First of all, the government of Thailand, Malaysia, Indonesia and the Philippines need to let the regulator be independent of all the political influences. In these countries where politics plays a very important role in the electricity sector, the process of establishing an independent regulator could be difficult if not impossible. Second of all, an effective regulator must have a comprehensive understanding of the electricity sector (both in general and in its specific country). It takes a long time for the regulator to learn and acquire expertise to become effective (Thomas, 2006).

From the past experiences, we learned from Thailand, Malaysia, Indonesia and the Philippines that electricity reform is a very delicate issue. For most countries in the world, privatization and market liberalization are adopted as means to achieve the sole objective of reform–highest achievable efficiency. For the four countries discussed in this paper, efficiency was usually overlooked or used as an excuse to fulfill many political objectives. In Thailand, for example, the Thaksin administration almost privatized EGAT without liberalizing it (i.e. without splitting up the company). As discussed earlier, it is unlikely that this process would result in higher efficiency. Here, an independent regulatory body could help emphasizing the real objective of reform. Although the process of establishing one could be long and difficult, the gain from well-planned policies and higher efficiency is worth it.

http://www.unctad.org/sections/wcmu/docs/c2clp_ige8p25asia_en.pdf

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http://www.atimes.com/atimes/Southeast_Asia/JF10Ae01.html

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Power politics in the Philippines

By Joel D Adriano

MANILA – A battle for control of the Manila Electric Company (Meralco), the Philippines’ dominant power distributor, goes to the heart of the country’s severe economic inefficiencies and underscores the still strong control a handful of business families have long asserted over the national economy.

On one side is the powerful Lopez family, franchise owner and largest shareholder of Meralco with a 33.4% stake held through its First Philippine Holdings Corp (FPHC). As a five-member voting block, the Lopez clan maintains the largest number of seats on the power distribution company’s 11-member board.

On the other side is the government, which holds four board seats and maintains a 33% stake in the company, including a 23% stake held by the Government Service Insurance System (GSIS). The final two board positions are now held by independents, and both sides to the struggle appear to be trying to assert influence over these pivotal votes.

Tensions came to a head late last month when the Securities and Exchange Commission (SEC) ordered an injunction against the holding of a shareholder meeting, which the Lopez-controlled board went ahead with nonetheless. The complaint was filed by GSIS president Winston Garcia to guard against new Lopez family proxies being voted onto the board, according to news reports. Manuel “Manolo” Lopez maintained his chief executive position with the company after the contested meeting.

Garcia said he plans to contest the legality of that meeting and in the same news reports accused the Lopez family of “unconscionably high power rates, padded by billions of pesos in questionable pass-on rates”. He has also publicly vowed to seek a change in Meralco management, lower electricity tariffs and file fraud charges against the company for allegedly overcharging consumers.

Oscar Lopez, FPHC’s chairman and chief executive, has denied the charges and challenged the government to buy out his family’s share in Meralco, which at current market prices would amount to about 35 billion pesos (US$795 million). The government has repeatedly said it does not aim to seize outright control of the power company but rather wants to lower electricity rates to help Filipinos cope with inflation as well as reduce the cost of doing business in the country, a perennial complaint of foreign investors.
The political controversy has beaten down Meralco’s share price, which fell as low as 59 pesos last week, down from a high of 116 pesos last year. Many analysts still have a “sell” on the stock. “The ongoing quarrel leaves a bad taste for investors,” said Olan Caperina of BPI Asset Management Inc, a local fund. Despite a 4.6% increase in electricity sales, Meralco’s net income tumbled by about two-thirds to 4.04 billion pesos last year, from 13.88 billion pesos the previous year.

The SEC injunction represents the latest round in a growing row over the real causes of the Philippines’ perennially high power rates, which critics say undermine overall economic efficiency and the country’s ability to attract and retain foreign investment. The Philippines has the second-highest electricity rates in Southeast Asia, trailing only Cambodia.

Exceptionally high power rates were cited as one reason why Intel Philippines, one of the country’s biggest foreign investors and largest employers, with over 5,000 workers, plans to close down its Philippine operations and divert the company’s investments to lower-cost Vietnam and Malaysia. A recent government survey showed that the high cost of electricity is one of the main reasons why foreign investors are reluctant to locate their businesses in the Philippines.

Consumer groups such as the National Association of Electricity Consumers for Reforms, or Nasecor, pin the blame on Meralco, which controls about 75% of the power distribution in Luzon province, which includes the capital city of Manila. Luzon also accounts for 75% of all energy demand in the Philippines and is home to 87% of the country’s current installed generation capacity.

Shocking discrepancies

According to the Heads of ASEAN Power Utilities/Authorities, a consultative group attached to the 10-member Association of Southeast Asian Nations, the average cost of electricity in the Philippines last year was 17.5 US cents per kilowatt-hour (kWh). That is more than three times the 5.38 per kWh cost in Vietnam, and is markedly higher then the 6.77 per kWh cost in Indonesia, 7.67 per kWh in Malaysia and 8.50 per kWh in Thailand. Even high-cost Singapore recorded cheaper power rates at 13.07 per kWh.

The problem, analysts say, is both structural and political. In the early 1990s, the Philippines faced an economic growth-stunting energy crisis, in which installed capacity failed to keep pace with surging demand. To cope, then president Fidel Ramos fast-tracked energy-related investments, including big ticket outlays for so-called independent power producers (IPPs). Energy investments surged to $2 billion in 1995 from only $250 million in 1991.

By 1998, foreign-owned IPPs accounted for 4,800 megawatts of generating capacity and accounted for $6 billion in total investments, including outlays from big international energy firms such as Mirant Corporation, Enron, CalEnergy, Marubeni and Kepco. Over that seven-year period, the government signed over 40 take-or-pay contracts, where it committed to take certain amounts of energy from IPPs, and the national power crisis ebbed.

Investments in IPPs nonetheless remained strong to meet anticipated higher future demand. When the 1997-98 financial crisis hit, the World Bank and others warned that overinvestment in IPPs and the government’s locked-in commitment to take-or-pay contracts could result in very high electricity rates. Ten years later, and those forecasted high rates have become a drag on growth and investment, some economic analysts say.

An official at the Department of Energy (DOE), who requested anonymity because he was not cleared to speak publicly on the matter, said the reason for the Philippines’ comparatively higher rates is a mix of market and non-market factors, partially because other ASEAN countries have more competitive power markets, and partially because their respective governments subsidize electricity prices where Manila does not.

Complaints over increase
Some wonder if that’s about to change. The current furor over high electricity rates began after President Gloria Macapagal-Arroyo ordered the state-owned National Power Corporation (NPC), a power generator, to look into complaints filed against Meralco by the Federation of Philippine Industries over what the business group viewed as an unjustified 0.52 centavo increase in generation charges levied by Meralco in April.

To be sure, Meralco’s generation charges are a complicated – some say opaque – calculation. Rates differ depending on from where and when the power was sourced. A typical Meralco power bill includes variable rates from different power suppliers, including NPC, three independent power producers (IPPs), as well as spot market rates known as the Wholesale Electricity Spot Market (WESM).

Before the Electric Power Industry Reform Act of 2001, there were only three items on Filipinos’ monthly electricity bills, namely: basic charges, purchased power agreement and an exchange rate adjustment for the price of imported fuels. Now generation charges are the largest of eight different charges in a typical Meralco bill, including transmission, systems lost, distribution, subsidies, taxes, universal charges and other charges.

Because the fees are lumped together, consumers have long complained its unclear how much they are paying for each line item, including the actual cost of the electricity itself. Moreover questions have been raised about the pricing of power bought from two specific IPPs, known as the Santa Rita and San Lorenzo power stations, both of which are also owned by the Lopez family.
Political charges
What started as a minor accounting inquiry into Meralco’s pricing policies has since morphed into a full-blown political controversy, as critics and politicians level various price-fixing allegations against the company. On May, 12 congress launched a joint investigation into Meralco’s operations, with a stated view towards lowering the company’s rates.

Meanwhile, senator Juan Ponce Enrile went a step further and questioned the legitimacy of the Lopez family’s controlling stake in the company. The family has throughout denied any foul play or pricing manipulation, but the controversy has raised the company’s political risk premium and has already taken a toll on its capital position via the fast-declining share price.

The Lopezes are one of the Philippines more storied corporate families. Along with its stake in Meralco, the family owns two power generation plants, the geothermal firm Philippine National

Oil Company-Energy Development Corp as well as the country’s biggest media conglomerate, ABS-CBN Broadcasting Corp.

Political troubles are nothing new to the clan. The Ferdinand Marcos administration was wary of the Lopez family’s commercial and media power and when his government declared martial law in 1972, it forcibly took over the family’s media businesses and put then patriarch Eugenio Lopez Sr’s son in jail for alleged subversive activities. Under political pressure and with a favored son in detention, the Lopez family sold its stake in Meralco in 1978 for more than 800 million pesos.

When Marcos was driven from power in 1986 and Cory Aquino was in the political ascendancy, the Lopezes were able to regain their shares in Meralco. The family’s broad business interests came under intense media scrutiny, with never-proven allegations of receiving preferential treatment, during Joseph Estrada’s administration because Manuel “Beaver” Lopez married Estrada’s daughter, Jackie.

Meralco is a huge money-spinner for the Lopez family, with an estimated 4.3 million customers, of which 80% are residential subscribers in the country’s strongest purchasing power area, metropolitan Manila. Viable competition is scarce: the company is 10 times larger than its nearest rival, the Visayas Electric Co, in terms of number of customers served.

Critics say that allows Meralco to charge higher than market rates, despite the economies of scale advantages the company enjoys through operating in areas of high population density. Last year, Meralco on average charged 4.90 pesos per kWh, considerably more than its closest competitors which averaged between 3.80 pesos to 4.10 pesos for the same amount of power consumed.

Pricing power

Pete Ilagan, chairman of the consumer group Nasecor, blames those comparatively high rates partially on the pricing of power that Meralco purchases from the Lopez family-owned IPPs. He also points to what he perceives as laxity at the Energy Regulatory Commission, which is charged with reviewing power companies’ petitions to raise rates with an eye toward safeguarding the public interest.

Meralco buys about 50% of its power from the 1,000-megawatt Santa Rita and the 500-megawatt San Lorenzo plants, both of which are owned by the Lopez family. The company buys an additional 40% from NPC and the remaining 10% from WESM. As per a contractual agreement, power from the two family-linked IPPs is delivered at a flat 4.24 pesos per kilowatt hour rate, regardless of what time of the day the power is tapped.

In comparison, NPC’s rates depend upon when the power is actually tapped, with fees varying widely for peak and non-peak hour consumption. NPC charges 6.06 pesos per kWh for peak times, but only 1.80 pesos per kWh for non-peak hours. About 80% of Meralco’s purchases from NPC are transacted at peak hours, a purchasing policy NPC and others have said is done to manipulate public opinion. In a recent statement, NPC denounced a Meralco public relations campaign carried over its family held media outlets, which blamed NPC for the company’s high power rates.

Dennis Gana, an NPC spokesperson, said the media campaign was misleading because Meralco’s take-or-pay contracts with the Santa Rita and San Lorenzo power generators include guaranteed volumes of about 85% of each plant’s capacity, which is paid regardless of whether Meralco actually takes the guaranteed minimum amount of power each month.

As such, he questions whether Meralco should continue to buy such a large portion of its non-peak power from IPPs, when the contracted minimum has already been met during peak hours and NPC rates are more than 60% cheaper. The NPC spokesman also said that consumers who rely on NPC for 100% of their power needs enjoy rates of between 3.60 pesos per kWh to 3.90 pesos per kWh lower than Meralco’s consumers, which on average were billed 4.90 pesos per kWh in April.

How the Meralco controversy is finally resolved will inevitably have an impact on investor sentiment beyond the energy sector. The Lopez family-owned IPPs both came online at a time when the Philippines was swamped in overcapacity. Over the past decade, however, new investments in power generation have been few and the DOE warns that without substantial new outlays a new power crisis could loom as early as 2010, when a number of aged power plants are scheduled for retirement.

The current controversy over Meralco’s pricing and rumors of a possible government takeover of the power company has raised investor fears of more government intervention in the market – including among those who have lamented the country’s very high electricity prices. The Joint Foreign Chambers of Commerce issued a position paper on May 27 warning of the possible adverse impact of too much government interference in the energy sector. Fairly or unfairly, the Lopez family once again finds itself stuck in the political middle.

Joel D Adriano is an independent consultant and award-winning freelance journalist. He was a sub-editor for the business section of The Manila Times and writes for Asean BizTimes, Entrepreneur Philippines, Masigasig and People’s Tonight.

(Copyright 2008 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)

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http://findarticles.com/p/articles/mi_7968/is_2002_Sept_28/ai_n33230074/

High electricity cost weighs down on RP competitiveness
0 Comments | Manila Bulletin, Sept 28, 2002

Byline: EDU H. LOPEZ

High electric power cost in the Philippines continues to weigh down on the ability of local goods to compete here and abroad.

Former economic planning minister Gerardo Sicat said this would continue until the power sector reform low is set into motion.

During a conference on competition policy in the 21st century hosted by the Philippine Institute for Development Studies, Sicat revealed for the first time the four main sources of exorbitant electricity charges passed on to home owners and industries in the country.

Number one cause, Sicat says, is high generation costs. The main culprit is the high cost of contracts with independent power producers (IPPs) entered by the government at the height of the energy crisis in the 90s.

But this only partly accounts for the problem, he argues. Another reason is the fact that power generation in the Philippines is still one fifth (21%) dependent on imported oil whose price in the global market has remained volatile.

In all, the countrys power sector is still more than half dependent on imported fuel. And even when the country has reduced its dependence in imported oil, the discovery and development of geothermal energy and natural gas has not brought down the cost of power generation.

This is because the power projects harnessing indigenous energy have been built with foreign borrowings and foreign direct investments that are all denominated in dollars.

The second cause of high electricity rates can be traced to monopoly at the generation and distribution levels. The bundling of wholesale power rates sold by the state-owned National Power Corporation allows for cross subsidies through average costing, not actual costs. Besides, NPC assets are not priced correctly according to their contribution to overall operations.

The private monopoly distributors like MERALCO can take advantage of their monopoly power by charging acceptable expenses that include amortization of loans. Operating expense can be bloated to hide high profit margins.

Third major cause of high power rates has been traced by Sicat to the high systems losses of electricity distributors including MERALCO which are paid by consumers. He says, systems losses in the Philippines are highest in East Asia and are mostly caused by simple inefficiency.

Citing an example, Sicat says that systems losses of MERALCO are twice higher than those of South Koreas average. The smaller utilities are even worse off. And the national average is 12.6 percent of gross generation consumers.

Fourth reason is poor management, of which the high percentage of pilfered electricity and lost current along defective wires and transformers are only a symptom. Most distributors are heavily indebted whose payments are also tacked into the monthly bills of consumers.
COPYRIGHT 2002 Manila Bulletin Publishing Corp.
COPYRIGHT 2009 Gale, Cengage Learning

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Standard and Poors – http://www.bi.go.id/NR/rdonlyres/C279413D-F52B-477E-9484-450D4EC54588/9635/PhilippinesvsIndonesiareport4Sep2006.pdf

I n the Philippines, high public sector leverage came about in a very
different manner, and through different causes. The count ry has weathered the
Asian financial crisis relat ively unscathed, notwithstanding its currency
depreciat ion, and a mild output cont ract ion (negat ive 0.6% against negat ive 14%
in I ndonesia in 1998) . The cause of mount ing debt is found in its steadily
deteriorat ing capacity to generate revenue, evidenced by a decline in the general
government revenue-to-GDP rat io to 14.5% in 2004 from 19.2% in 1997. This
decline resulted from a combinat ion of a liberal regime of tax incent ives, a high
incidence of tax evasion, and deteriorat ing administ rat ive and enforcement
capacity in the count ry’s three revenue-collect ing organs. Successive
administ rat ions lacked the commitment and polit ical will to address these
problems, daunted by the prospect of implement ing unpopular measures, and of
confront ing vested interests in the bureaucracy, congress, and the business elite.
I n addit ion to the revenue problem, a significant source of the count ry’s mount ing
debt was the state-owned elect r icity company Nat ional Power Corporat ion (NPC) ,
whose large losses (owing to highly politicized tariff-setting, which for years locked
it into a money losing posit ion) necessitated sovereign borrowing on its behalf,
and the government’s absorption of a portion of its debt

By cont rast , the Philippines has a heavy reliance on
commercial external borrowing, with commercial funds making up close to half its
total external borrowings.

By cont rast , the polit ical backdrop in the Philippines has remained generally
volat ile over the past several years, featuring episodes of at tempted coups, and
president ial impeachments. Policy-making and implementat ion remain subject to
interference and delay by a fragmented legislature, in which regional and vested
interests hold sway. The Arroyo administ rat ion’s determined reform efforts have
been marred by opposit ion at tempts to scut t le or water down measures aimed at
improving the count ry’s fiscal posit ion. Opposit ion at tempts to remove President
Arroyo from office, through repeated impeachments, and by t rying to engineer
popular and military revolts, have caused addit ional and ongoing polit ical
uncertainty. A number of long running insurgencies in various parts of the count ry
also cont inue, and President Arroyo’s tougher approach, which includes enlist ing
U.S. military help on the ground, has yet to produce a notable improvement . As a
result , security concerns in part icular areas of the count ry prevail, and feature as
one of the deterrents for investment.

In the case of the Philippines,
growth prospects appear to depend on an improved fiscal set t ing, such that debt
service costs come down to manageable levels ( from the current one third of
expenditure) , which would allow greater spending on infrast ructure and educat ion.
The out look in the Philippines, however, is somewhat less certain than in
I ndonesia. A turnaround in fiscal fortunes only begun in earnest at the beginning
of 2006, when the Arroyo administ rat ion’s reform init iat ives began to take effect .
Maintaining these improvements and building on them will require ongoing political
commitment and wherewithal, which from t ime to t ime could come under threat
by the country’s volatile politics.

For the Philippines, remit tances from overseas workers are the main source of its
external st rength, while its main export is elect ronics, which accounts for
approximately 65% of total exports. Money remit ted by offshore workers
const itutes a stable and growing source of foreign exchange, one that is largely
immune to the domest ic economic cycle and domest ic polit ical condit ions. At more
than US$11 billion per year ( for a populat ion of 84 million) , remit tances received
by Philippine cit izens dwarf the approximately US$1 billion sent home by overseas
workers from Indonesia, a country of 224 million. The Philippines’ highly successful
labor expor ts reflect the sovereign’s relat ively high educat ion and skill levels, and
its cit izens’ English proficiency. This ensures that the deployment of overseas
workers from the Philippines is well diversified both in terms of indust ry and
geography, and remittances will, therefore, continue to underpin external balances
and domestic consumption for the foreseeable future.

Common to both count ries is that net FDI has been negligible for much of the past
10 years, lending lit t le support to balance of payments and economic growth. The
lack of FDI places an indirect const raint on credit fundamentals, largely through
the effect on growth prospects, but also because foreign capital inflows are a more
stable source of external liquidity than port folio inflows. The deterrents keeping
foreign investors away are largely similar in the two count ries, although varying in
extent . Corrupt ion, legal uncertainty and bureaucrat ic obstacles rank as the main
causes in Indonesia (placed 140th on Transparency I nternat ional’s Corrupt ion
Percept ion I ndex) . These factors are also present in the Philippines, even if less
pronounced and less pervasive ( ranked 124th on the same index) . The cost and
reliability of elect ricity supply and t ransport infrast ructure, however, are common
deterrents in both count ries, as are the difficult ies in addressing these issues due
to a lack of funds in the cent ral governments. To boost FDI and growth prospects
in general, therefore, both sovereigns need to implement judicial and legal reforms,
and embark on well-targeted infrastructure spending.

****

For short – PROTECTIONISM WHICH PROTECTS THE INEFFICIENT LOCAL ELECTRIC UTILITIES IS THE CULPRIT.

Remove Sec 10 and 11, Art 12 of the Constitution.

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From → Economy

14 Comments
  1. my kid neighbor made an innocent comment about this issue. she said na maybe if there’s another meralco, perhaps two more, people can choose to pay less. she isn’t in high school yet and has no sense of economics.

  2. keith permalink

    one word brings everything into focus in everything in the Philippines.

    Corruption

    the people should get rid of it.

  3. You precisely saved me atleast 1 hour of time. I am making a project in this particular topic and your contribute has helped me through one of the topics of my project. I will browse to the other pages now.

  4. ann permalink

    corruption is the main problem in the Philippines this kind of problem never get rid easily because this is the way they move in their daily activity that’s rubbish people are so greedy to money and power that’s the way they act…

    (sigh)

  5. ann permalink

    i hope The president knows this…pls Mr. president don’t loose ground we are hoping you can eradicate the problem and solve the mystery of death sentence of Filipino in china…pls investigate and catch the real culprit many people rely on you..

    GBU always….

    We are hoping you can hear our voices….

  6. Anonymous permalink

    The government needs to set up a regulatory system that gives an equal playing field to power companies.

  7. Distribution monopolies (for the customers of Meralco, the distribution charge is reflected as the 4th item in the Billing Summary of your monthly electric bills). Distribution charges account for around 12% of electricity rates. Private distribution utilities and electric cooperatives throughout the country monopolize the distribution business in their respective captive area of operation.

    A natural monopoly is characterized by the absence of a market and so, where there is no market, there is no competition that can stimulate lower rates, better service and improved operating efficiency

  8. robbietan permalink

    articles quoted by the author are all biased and useless. unless you plan to run for elective office, at least

  9. sa totoo lang mas mahal ang kuryente ng pilipinas ikumpara sa japan. sa pinas, isang may bahay n ang bill ng kuryente ata ay mahigit 6 thousand pesos. may karenderia daw sya at 2 electric fan lang ang ginagamit sa shop nya, means walang aircon. ang kuryente ko ngayon sa japan ay nasa kulang kulang 5 libong piso( estimate cost convert to philippines.) madalas gamit ko ng aircon kasi mainit init pa din ang klema dito. ang laki ng difference ng electric bill ! kung tutuusin mataas ang gap ng mga cost sa japan compare to philippines. pero nagugulat ako sa laki ng bill ng kuryente sa pilipinas. paano yung mga pinoy na ang kita lang sa isang bwan ay lets say 7,000pesos, paano yung ibang bayarin kung sa kuryente lang ito mapupunta….. tang ina this!!!!

  10. corruption is the main problem in the Philippines this kind of problem never get rid easily because this is the way they move in their daily activity that’s rubbish people are so greedy to money and power that’s the way they act…

    (sigh)

  11. This is a topic which is near to my heart… Cheers! Exactly where are your contact details though?

  12. anpe permalink

    ang kuryente sa pinas ay mas mahal pa sa kesa sa US. may kaibigan ako sa US sabi nya ang kuryente daw nya ay nasa $60 – $70 lang pag summer pero gamit nya ay 3 malalking TV, isang malking ref, 3 computer, araw2 gamit oven, electric burner gamit nila, toaster, aircon, lahat ng basta gamit ay elctricity ay nagagamit nila araw2. sabi nya pag winter nsa $120 to $170 lang din ang electricity bill gamit nila gas electric at lahat ng mga pedeng gamitin na appliances ay gamit nila. 2400 sqft ang size ng bhay.

    sa pilipinas pag electric fan, ref gamit mo at tv ang kuryente ay humigit kumulang sa P2000 na.
    pano mabuhay ang mahihirap dyan. ang negosyanteng ganito ay yumayaman lalo at ang mga mahiihirap ay lalong naghihirap. dyois ko. putsang yan.

  13. Anonymous permalink

    Siguro kung kasing laki at kasing asensado ng Pilipinas ang U.S. at Japan, baka maging pareho na rin ang presyo ng kuryente sa ating bayan. Pwede ba mag-isip isip naman kayo, hindi pwede pagkumparahin ang mga bansang iyan, Para mo naman sinasabi na kung ano ang lasa ng apple ay pareho na rin sa lasa ng bayabas. Pwede ba, hwag kayo mag-utak grade 1 !

  14. Anonymous permalink

    Kayong mga ugak! Ang Amerika ay Amerika, ang Pilipinas ay Pilipinas! Hindi magkatulad yun, hindi pwedeng magkaparehong mura ang singil sa kuryente dun dahil magkaibang bansa yun! Ampota naman, ang bobo ng analysation nyo!

    Ang dapat nyong analysation, kung anong factors ang nagpapamahal sa kuryente sa Pinas. Yun ang tingnan nyo, at mag suggest kung ano ang pwede nyong gawin para matulungang ibaba ang presyo. Hindi yang ngak ngak kayo ng ngak ngak dyan, wala naman kayo suggestion kung anong dapat gawin! Ampota!

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