by ALECKS P. PABICO

IT WAS hailed as a groundbreaking law that would not only result in lower power rates for both household and industrial consumers, but would also unburden the government of some P38 billion in annual subsidies to the power sector.

	SIX years after the enactment of the EPIRA, residential electricity rates have doubled, while industrial power rates are now the highest in Asia. [photo by Jaileen F. Jimeno]

At the time, no less than President Gloria Macapagal Arroyo said that had Congress failed to pass the Electric Power Industry Reform Act (EPIRA), it would have meant the continued ballooning of the debts of the National Power Corporation (NPC). That would have deprived the government of much needed funds to meet the Filipinos’ other basic needs, which the chief executive even itemized in terms of 16,000 classrooms, 127,000 hectares of irrigated land, 76,000 low-cost houses, or 6,300 kilometers of road.

That was more than six years ago. Today residential power rates are double what they were in January 2001, when Arroyo first came to power, while the country’s industrial electricity rates are the highest in Asia. At the end of 2001, NPC’s debts and obligations stood at P851 billion; by last year, the figure was hitting P1.2 trillion — and that was minus the P200 billion already absorbed by the national government in 2004 as mandated by EPIRA.

EPIRA or Republic Act No. 9136 has thus joined a long line of laws that have fallen short of their objectives because of a combination of flawed provisions and implementation. In the case of EPIRA, these include the continued tolerance of old contracts whose onerous provisions have only contributed to the ever-rising debts of the NPC, monopolistic practices that have resulted in the abuse of market power, and the slow pace of the ordered privatization that has hindered competition.

Ateneo de Manila University economics professor Aleta Domdom in fact says that EPIRA only introduced competition at the level of generation, with distribution still remaining monopolistic. “Even if the distributors face competition in terms of choosing among generators,” she says, “they still have the power to raise prices, of course, subject to the approval of the ERC (Energy Regulatory Commission).”

To be sure, the surge in world oil prices — which last week reached $96 a barrel — has contributed as well to steep electricity rates, especially since many local power plants depend on imported oil-based fuel. But Domdom says this is just one of several external factors that the crafters of EPIRA failed to emphasize enough.

“The increase in world-oil price is greater than the appreciation of the peso-dollar exchange rate,” notes Domdom. “Then there is also the fast growth of China which competes in the demand for world energy sources. When demand increases, but supply remains the same, prices tend to increase.”

IRONICALLY, HIGH electricity prices are being used to lure in investors, says economist Maitet Diokno-Pascual, former president and now board member of the Freedom from Debt Coalition (FDC). She says the situation is due as well to the overpriced excess capacity from the contracts with independent power producers (IPPs) that the Ramos administration entered into during the energy crisis in the early 1990s.

“Its contractual obligations to the IPPs are the single biggest reason for the fatal financial bleeding of the NPC, posing additional burden to the government's fiscal position,” seconds FDC power campaign team coordinator Maris de la Cruz.

Even the Department of Energy (DoE) has acknowledged that payments to IPPs — which last year amounted to P536 billion — explain why the Philippines continue to have higher electricity rates. Former energy secretary Raphael Lotilla, lamenting over a government decision two decades ago to honor all the country’s debts, remarks, “I wish we could undo all this, but this should also tell us that our policy decisions have an economic cost.”

With a strong peso, the NPC has managed to post remarkable net incomes in the last two years, sustaining a financial recovery in 2005 with profits of almost P86 billion. But it's a turnaround from seven consecutive years of losses, with revenues largely going to payments to the IPPs. This is because of the take-or-pay provision in their power contracts that requires the NPC to pay for a fixed volume of electricity at fixed rates, whether or not the state-owned corporation actually uses the entire volume and whether or not the IPP actually produces the entire volume.

Of the 90 percent generating capacity that NPC pays IPPs for, only 10 to 40 percent is actually produced and used, says de la Cruz. And this is on top of other risk-free provisions in the contracts as fuel cost and foreign exchange loss guarantees.

The NPC has routinely passed on the bulk of the costs of these guarantees to consumers, reflected early on in electricity bills as the purchased power adjustment (PPA) but now hidden, FDC says, under “several categories but primarily under generation costs.”

In 2002, President Arroyo ordered a cap to what the NPC could recover from consumers for the IPP contracts; the charge thus shrunk from P1.25/kWh to 40 centavos/kWh. But this has proven disastrous to NPC as it slashed revenues by 85 centavos/kWh. After only two years, NPC had already absorbed a loss amounting to a staggering P16 billion. Today the NPC debt stock has a value of half a trillion pesos.

The government absorbs one-third of the NPC’s debts even as it incurs loans to restructure the entire power sector. Restructuring was part of the Asian Development Bank (ADB)'s 1995 energy policy that prescribed full recovery costs, reduction of subsidies, aggressive promotion of private sector involvement in the energy sector, and the creation of an enabling environment for private investors. EPIRA’s passage in 2001, in fact, was a condition for the release of much-needed loans from the ADB and Japan Export-Import Bank amounting to $950 million. Last December, ADB also extended a $450-million Power Sector Development Program loan, primarily meant for the servicing of NPC's debts. The Bank estimates that about $9.1 billion would be needed to finance the power sector until 2010.