Special report: What’s wrong with EPIRA?

(Conclusion)

MANILA, Philippines - The outrage over rising electricity prices has prompted energy stakeholders to call for amendments to the Electric Power Industry Reform Act (EPIRA) of 2001, a landmark law that promised reforms in the power sector.

EPIRA introduced sweeping reforms, including the restructuring of the entire power industry and the privatization of most state-owned power generation and transmission assets, which at the time were leaving a heavy dent on state coffers because of the high costs of maintaining them.

The reforms were intended to foster competition among power players and bring down electricity prices.

In particular, according to the Department of Energy (DOE)’s briefer on EPIRA, the goals of the law were to ensure affordable and reliable supply of electric power.

The law also aimed “to ensure transparent and reasonable prices of electricity in a regime of free and fair competitions and full public accountability to achieve greater operational and economic efficiency and enhance the competitiveness of Philippine products in the global market.”

Furthermore, according to the DOE, the law is meant to protect public interest as well as establish a strong and purely independent regulatory system to ensure consumer protection and enhance competition in the electricity market.

The situation that led to the enactment of the EPIRA had a lot to do with high power prices, a situation which electricity consumers had to deal with in December last year.

Prior to the passage of EPIRA or Republic Act 9136, the government monopolized power generation and transmission.

The law sought to break the monopoly by breaking down the power industry into different privatized segments. It was the government through the National Power Corp. (Napocor) that used to hold the monopoly over power generation and transmission.

“However, in the early 1990s it was foreseen that the national demand for electricity would increase by nine percent annually for the next ten years,” said Menandro Abanes, a researcher on Southeast Asian issues in his book, “Revisiting the 10-year Philippine Electric Power Industry Reform Act of 2001.”

“To meet the predicted demand, 5,000 megawatts was needed, translating to necessary government infusion of approximately P38 billion annually into the development of the power industry to curb the shortfall, without which another power crisis reminiscent of the 1980s and 1990s was expected,” he said. The government, however, was unable to infuse funds into Napocor because of a budget deficit that hit P145 billion at the time.

Then President Fidel Ramos, to address the situation, entered into contracts with independent power producers (IPPs). The contracts later turned out to be onerous because of the provision that guaranteed the purchase by government of up to 80 percent of their production.

“By 1994, the Philippines had more IPP contracts than the rest of the developing world combined,” said Erik Woodhouse in his paper “IPP Experience in the Philippines” published in the website of Stanford University.

“Thus, when the Asian financial crisis struck in the late 1990s, the fiscal and monetary disruption following therefrom had an immediate impact on the IPP sector in the Philippines, making the take-or-pay or capacity payments included in the power purchase contracts unsustainable,” Woodhouse said.

By December 2000, Napocor had accumulated debts of P900 billion, nearly half of the government’s P2.179-trillion debt. For the government, its only option was to privatize the power industry.

EPIRA amendments

But Energy Secretary Carlos Jericho Petilla said that given the current situation, especially the rising power prices, there may be a need to revisit the EPIRA.

One possible amendment is to allow the government again to enter into power generation, even just for energy security assets.

“For security asset, the government must be able to own and operate it,” Petilla said.

Petilla said the ideal situation is for the government to be able to operate a plant on standby if and when necessary.

“The government will operate the power plant during times of curtailment or shortage even for just one to two hours,” he said.

He said that if new plants come in, the government plant may stop operating.

However, the EPIRA prevents the government from having its own plant.

He said the solution is to change the law to allow an energy security asset such as a government-run plant.

At present, the energy department is forming teams to study possible amendments to EPIRA, Petilla said.

“The DOE will facilitate discussions,” he said.

The target is to file the proposed amendments in the first quarter of the year, he added.

Stronger ERC

Another possible amendment is to strengthen the Energy Regulatory Commission (ERC).

“That can be suggested. We are happy to look at everybody’s point of view,” Petilla said.

Militant groups, which had earlier filed a petition against the record December 2013 generation rate increase of the Manila Electric Co. (Meralco), were questioning the regulatory capability of the ERC.

“Respondent ERC committed grave abuse of discretion in approving Meralco’s proposal to pass on to consumers the increase in the generation cost for November 2013 as it violates its mandate under the EPIRA to protect the consumers from anti-competitive practices and abuse of market behavior of industry,” party-list group Bayan Muna said in its petition.

“It approved the rate increase with haste and without exercising the required regulatory role, which constitutes grave abuse of discretion,” it added.

Indeed, as The STAR columnist Boo Chanco, who had worked with the Ministry of Energy from the ’70s to the ’80s, had pointed out, the ERC should be able to determine if Meralco had exhausted efforts to keep generation costs as low as possible.

“When Meralco says it is not its fault because they are just passing through the cost of the generators they are telling us a half truth. The other half they are not saying has to do with the fact that there was something they could have done to keep the generation cost as low as possible. Of course that is on the assumption ERC is intelligent enough to allow them to,” Chanco said in a Jan. 10 article.

The ERC insisted it did not err in its regulatory function, saying an Automatic Generation Rate Adjustment (AGRA) is allowed and established under EPIRA.

“All told, the ERC respectfully submits that the AGRA mechanism upholds the principle of full recovery of prudent and reasonable economic costs as established in Section 25 of EPIRA. Moreover, conscious of the implications that the rate implications may have on the pockets of the most number of consumers who are indeed heavily burdened and true its mandate to protect the interests of the consumers gave clearance for the collection of the generation cost in a staggered manner without prejudice to the confirmation and post-validation process which will include a finding of whether the generation was procured in the least cost manner,” the ERC said in its comments submitted to the Supreme Court.

New gas fields

Petilla said also said one permanent solution to soaring electricity prices is to drill for more oil and gas to lessen the country’s dependence on imported oil.

“The permanent solution is to drill again but we can only do that if we have a clear signal from the DND (Department of National Defense),” Petilla said.

China and the Philippines are locked in dispute over some areas in the West Philippine Sea, including Recto Bank covered by Service Contract 72 held by the group of businessman Manuel Pangilinan.

The area is estimated to contain prospective resources of as much as 16.6 trillion cubic feet of gas and 416 million barrels of oil.

Whether amendments to EPIRA would push through in Congress remains to be seen.

In the meantime, electricity consumers, including Meralco’s 5.3 million customers, would have to brace for higher electricity bills as the power distributor is determined to recover costs once the Supreme Court’s temporary restraining order is lifted.