Privatization Of Power Sector, The Root Of High Power Rates

The impetus behind the current crisis is the restructuring of the sector through the Electric Power Industry Reform Act, or EPIRA, which was one of the first laws signed by President Gloria Arroyo in 2001.

Amid the flurry of accusations between private distributor Manila Electric Company (Meralco) and state-run National Power Corporation (Napocor) over unjust charges, one fact remains clear: privatization and deregulation of the power industry – distribution, transmission and generation – is at the heart of high electricity bills.

For example, consider the multitude of unjust ‘pass-on’ charges levied by Meralco on its customers. These include system losses, in which power lost through pilferage and technical problems are passed on to consumers and P500-million a year of Meralco’s own power consumption which is similarly reflected in electric bills. There is also a reported plan to pass bad debts incurred by the power distributor on to consumers.

These charges have been approved by the government Energy Regulatory Commission (ERC), which is tasked to regulate the rates of electricity distributors. Although blame has been placed on the ERC’s lax regulation for such excessive ‘pass-on’ rates, in truth the regulatory environment has become lenient because of deregulation of the power sector and while moving towards full privatization.

It should also be noted that although Meralco is a public utility with a congressional franchise, its essential nature is a private, profit-oriented corporation listed in the Philippine Stock Exchange. Thus, it should not be surprising that the company exploits legal loopholes to levy such unwarranted charges in order to fatten its bottom line and make its stockholders and owners happy.

The privatization of the power sector created profit opportunities for private-sector independent power producers (IPPs). In order to quickly attract investors to the sector, government had to ensure the power producers’ profitability. Thus, onerous provisions such as ‘take or pay’ (which required Napocor to buy 70% to 100% of power producers’ output) and ‘fuel cost guarantee’ (which obligated Napocor to source and pay for fuel used by IPPs) were tacked onto IPP contracts. These provisions bloated consumers’ power bills through charges such as the infamous Purchased Power Adjustment (PPA). They also contributed to Napocor’s skyrocketing debt burden.

It will be remembered that a government-mandated review of 35 IPP contracts during the Arroyo administration found that only six were “clean” or without financial or legal issues. Five were found to contain “onerous” terms that were “grossly disadvantageous to government”. However none of these contracts were cancelled, and were instead “renegotiated”.

High transmission charges have also been blamed as a factor in high power rates. But the National Transmission Corporation (Transco) is also set for privatization, and thus, needs to charge high rates in order to attract potential investors. It should also be noted that transmission charges are regulated by the ERC as well.

Open Access
The impetus behind the current crisis is the restructuring of the sector through the Electric Power Industry Reform Act, or EPIRA, which was one of the first laws signed by President Gloria Arroyo in 2001.

Before EPIRA the sector was composed of generation, transmission and distribution sectors. Napocor generated electricity on its own and bought electricity from IPPs, and transmitted this to distributors and large industrial customers through high-voltage wires. Distribution of electricity to end-consumers was done by privately-owned electric utilities, a few government-owned utilities and electric cooperatives.

Under EPIRA, the various components of the power sector are separated into generation, transmission, distribution and supply. Generation and transmission assets of Napocor would be privatized while distribution would continue to be handled by the private sector. The end goal of the sale of Napocor’s generation assets is “open access” which is government’s supposed answer to high electricity prices. “Open access” ostensibly aims to introduce competition into the industry by allowing consumers to select their supplier.

EPIRA advocates claim that competition would lower rates, particularly with a provision which states that no power generator should control more than 30% of supply in a given grid and ostensibly prevents monopolies. But the experience of the deregulation of the downstream oil industry demonstrates that such “competition” does not bring down prices. Deregulation has resulted in new players taking 12% of the market while the big three oil firms (Petron, Shell and Chevron) share the remaining 88% or an average of 29% per firm. This has not stemmed cartel-like behavior with oil industry players raising pump prices nearly simultaneously. It has also not resulted in lower prices, as pump prices of all petroleum products have raised an average of almost 580% since deregulation of the industry was implemented in 1996.

EPIRA also notably allows cross-ownership between distributors and generators. This has allowed the Lopez family to own a controlling share in Meralco while also owning IPPs. This situation has led to questions of conflicts of interest as Meralco would naturally be more inclined to buy power from its sister firms regardless of whether it is cheaper than electricity sourced from Napocor IPPs.

Reversing privatization
In the light of high costs in power rates, the reversal of privatization of the entire power sector becomes an increasingly viable answer. This entails the repeal of EPIRA law, reversal of the privatization of Napocor’s generation assets, and government control over the entire power sector – distribution, generation, transmission and supply.

Of course many would question the return of state control over the industry, particularly in light of corruption allegations against Napocor such as its alleged overbilling of customers by some P10 billion and its purchase of overpriced coal for its power plants.

However there remains no substitute for responsible state control in an industry such as the power sector whose natural monopolies will inevitably be exploited by private interests for maximum profit even at the expense of the public. And as a state-run industry, the people must have the right to subject the power sector to scrutiny and demand transparency in its operations. Effective state control remains the best solution to address high power rates– even as it is acknowledged that leaving the power industry to an administration known for allegations of corruption, unaccountability, and subservience to elite interests’ compromises achieving a pro-people power sector.

This feature also appears as a feature under IBON Foundation

Bangis: Krisis sa Langis

Crude oil and various petroleum products are crucial in literally fueling the economy of a nation, ensuring its security and defense and help provide basic consumer needs. Presently, oil has become a strategic and vital product to the global nations. If blood is the lifeline of our body, then oil is the lifeline of the economy, even sustains the life of a nation.

Ang langis ang nagpapatakbo sa industriya at serbisyo hanggang sa mga batayang gamit pangkonsumo. Ang langis ang nagpapatakbo sa mga makina ng sektor ng manupaktura at makinaryang agrikultural, sa mga sasakyan sa lupa, karagatan at sa kalawakan. Mahalaga ang langis mula sa paggana ng ating mga kalan sa kusina hanggang sa pagpapaandar ng ekonomya ng bansa.”

Speech of Anakpawis Representative Crispin Beltran
2008 Philippine Energy Summit,
January 29, 2008, SMX Convention Center
(former taxi driver and factory worker)

We are very much aware that the oil industry is very vital to the nation’s development. Our country is is a sanctuary of oil and energy sources such as the Malampaya and Nido in Palawan and the Liguasan Marsh in Central Mindanao. However, these and other potential energy sources like coal and geothermal are left for exploration and development in the control of foreign corporations, making us heavily reliant on imported oil products and its unending swelling of prices and eventually buying our own locally sourced new energy and power sources from foreign firms at higher costs.

Last year, the prices of various gasoline products increased by 24% (P35.75 to P44.45) while diesel prices hiked by up to 21% (P31.75 to P38.45). Cooking gas or LPG, most commonly used in households posted an increase of 21.95% (P533 to P650). Retail prices of kerosene which is used by small fishers as well as most households in the countryside and urban poor communities have jumped by 14%. Since Mrs. Gloria Macapagal-Arroyo rose to power in 2001, prices of gasoline products increased by 143% up to 147%; diesel prices increased by 172%. For the past twelve years since the Downstream Oil Industry Deregulation Law was enacted in 1996, prices of gasoline products increased by 352% to 364%; diesel by 434%; kerosene by 454% and LPG by 356%.

Majority of the basic masses with very low purchasing power suffer the burden of increase in prices of basic commodities that rise up with the price of oil. The government even joined in bleeding the people dry by imposing a 12% RVAT on these products.

Jeepney drivers, for instance, will have to work doubly hard to earn a decent income for their families with unabated diesel price hikes. Last year alone, a jeepney driver’s daily expense for diesel increased by P147.30 as the prevailing pump price of diesel jumped by P4.91 per liter between January and November 2007. (Based on transport group Piston’s estimate that a jeepney driver consumes an average of 30 liters of diesel per day) Diesel costs jeepney drivers around P1,125.90 per day and has to hand over between P600 to P900 (depending on the unit’s seating capacity) as daily “boundary” to the jeepney owner or operator. This means that he can only start earning for his family if he has already made P1,725.90 to P2,025.90 to cover for the diesel cost and the operator’s share.

In line with this, concrete and decisive steps must be implemented to stop these attacks on the income and livelihood of our people.

Repeal Republic Act 8479 or the Oil Deregulation Law
One concrete, urgent and practical solution to the ills of high oil prices is to repeal the Downstream Oil Industry Deregulation Law.

The Filipino people has suffered its wounding impacts such as under deregulation, oil companies are no longer compelled or bound by law to justify the increases. Under the same policy, Oil Price Stabilization Fund (OPSF) or subsidies on oil products was removed. The fund could have still been utilized to mitigate the effects of oil price hike more so that the public is demanding for transparency and accountability from its government. And lastly, the declaration that the law would result to effective competition and accessibility with the entry of new industry players did not result in competition and affordability nationwide, particularly in the rural areas.

The monopolistic control of transnational corporations was further encouraged by the Oil Deregulation Law. The existence of Petron, Royal Dutch-Shell, and Chevron (formerly Caltex) in the oil industry is the immediate reason for the overpriced and incessant increase in oil prices. They shamelessly and uncontrollably dictate the price of oil, pressure countries, even OPEC member countries, to create the market beneficial to their aim of earning billions of dollars.

Imagine, six oil giants control the oil industry from exploration up to retailing of petroleum products making them the richest and most powerful block in the world. Even the Supreme Court in its decision on the constitutionality of the 1996 version of the oil deregulation law affirms the existence of such foreign oligopolistic control in the local oil industry. That is the reason why it is disgusting to hear from the government that they can’t do anything to lower the oil prices.

Oil is a deliberately essential commodity and must, therefore, be developed and nationalized, under which price is controlled, for the benefit of the people. Through nationalization and regulation, there would be room for reforming purely profit-oriented mechanisms into a socially responsible handling of the oil industry. With a government at the forefront of managing the oil industry, it has the capacity to direct the downstream oil industry with the national thrust towards economic development.

Currently there are proposed measures in Congress filed by Anakpawis, Bayan Muna and Gabriela Women Party that we must espouse to address immediate and long-term solutions to the problems of the oil industry. These measures are:

House Bill 3029: An Act Regulating the Downstream Petroleum Industry - This proposal requires the regulation of the petroleum industry through the creation of a buffer fund and a Petroleum Regulatory Council that will not be bound by the dictates of oil companies. Regulation can only be effective and truly beneficial if it is part of a program to nationalize the oil industry, so that local oil prices can be brought down from unreasonable and unjustifiable levels set by giant transnational oil corporations and can be prevented from falling prey to further monopoly pricing and manipulation.

House Bill 3030: An Act Instituting Centralized Procurement of Petroleum in the Country - This bill sees the need to interdict the hidden and unchecked transfer pricing between oil company subsidiaries, including probable price padding in the sale of petroleum and petroleum products between refiners and local subsidiaries, to protect the majority of Filipinos from current runaway increases in oil prices. This can be done through centralized procurement of all imported crude oil and refined petroleum products, which includes the creation of buffer supplies to cushion consumers against drastic increases in petroleum prices, and the re-nationalization of Petron Corporation.

HB 3031: An Act Renationalizing Petron Corporation - This bill defines it as a State policy that the business of importing, exporting, re-exporting, marketing, distributing, and selling, whether retail or wholesale, as well as operations and activities of natural and juridical persons, firms, and entities engaged in such activities, shall be carried out in a manner consistent with the public interest. This policy aims to: a) To assure that locally refined and processed petroleum products, as well as imported crude oil and processed petroleum, be primarily for the benefit of the general welfare; and, (b) To assure the public of reasonable prices for petroleum products and to prevent unfair trade/business practices in the industry, particularly with regards to prices.

HB 1126: An Act to include LPG and Kerosene in the list of basic necessities in Section 3, Definition of terms of Republic Act 7581 or the Price Act - LPG and kerosene are considered basic household necessities and socially sensitive products. Ironically, both are not included in the list of basic necessities provided in Section three (3), Definition of Terms of Republic Act 7580, and otherwise known as the “Price Act.” Thus, the filing of this bill.

Other proposals include the moratorium on oil price hikes and the suspension of the 12%-Value Added Tax on oil products for a period of six months. When passed and sincerely implemented, can give immediate relief to almost half a million jeepney drivers and their families and 8.6 million households consuming LPG and 9.4 million households using kerosene.

This must start with the government declaring as a matter of national policy that all activities relating to the downstream and upstream oil industry must be under regulation and supervision so as to allow the State to:

1. Ensure adequate and continuous supply of crude oil and refined petroleum products under the most economic and competitive terms possible considering all available sources of supply, including local supply.
2. Ensure that the entire petroleum industry serves the national interest and economic needs of the country.
3. Ensure that the consuming public enjoys reasonable prices of petroleum products and prevent price manipulation, unfair competition and other trade abuses being committed primarily by big foreign oil corporations.
4. Promote Filipino capital, labor and technology in the downstream and upstream oil industry.
5. Uphold the constitutional guarantee of full state control and supervision over the country’s petroleum resources in the name of national interest and in pursuit of industrialization, while maximizing whatever benefits that foreign financial and technical assistance will bring in the exploration, development and utilization of local crude oil and other petroleum.

The diminishing accessibility of oil and basic commodities to the majority of the Filipino people is tantamount to eradicating our right to a dignified life. To reiterate what Ka Bel (Representative Crispin Beltran) pronounced, oil is the lifeline of the economy and we must struggle for the sustenance of the life of our nation.

REPEAL OIL DEREGULATION LAW!
SCRAP THE VAT ON OIL!
NATIONALIZE THE OIL INDUSTRY!

Sources:
Various IBON Databank position papers on the Oil Industry
Bagong Alyansang Makabayan Briefing Paper January 2008
Anakpawis Partylist
Bayan Muna Partylist
Gabriela Women’s Partylist
Sun Star
Philippine Daily Inquirer
Pinoy Weekly

(Prepared by the Peoples’ Struggles Committee of the University Student Council)